World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Wednesday, January 14, 2009

Weak financials and REITS led the market down again; on the day the DOW gave up 248 points, the S&P lost just under 3%, the NDX lost 3.3%, and the RUT led the indices down with a -4.4% showing. Notably the XLF lost 5.8% and IYR 5.2%, and the VIX gained 13.5%.

Yesterday I mentioned that I thought we probably had a small movement on the McClelland oscillator… well we did, and today obviously fulfilled that. The market was down broadly with internals very negative, nearly 9 to 1 on the NYSE with preliminary data.

Talk about sour fundamentals… Motorola just announced they would be cutting 4,000 workers, and in addition to Nortel, Gottschalk’s and Goody’s both filed for bankruptcy today . Just look at this retail sales chart from Calculated Risk:

The bond market never did get back into its channel, thus I now think I was probably early with that call. I got out like I said I would, and will look for signs that it’s topping again. I was looking at the charts of the bond market during the Great Depression and noticed that it was about 18 months from the October 1929 crash that bonds turned. That same point for us would be in late March or so, but obviously every situation’s different as history does rhyme but seldom repeats.

Regarding the indices, if you didn’t catch my post earlier with P&F chart breakdowns, I suggest you scroll down and look those over.

Let’s start on the charts by looking at a one month daily of the DOW. Not a pretty sight (unless you’re short!). Note how we went in the past 6 days from the top Bollinger band to the bottom. From overbought on the stochastic to oversold. Notice how it closed right on 8,200… that’s a support line from a couple of bottom points in October. Notice how the volume is increasing, volume confirms price. The bottom Bollinger is turning down, but we closed beneath it. At the start of past sell offs earlier this year the downward momentum was able to push the lower Bollinger down and out of the way. Here it’s going to depend, I think, on whether we are just starting wave 5 down (having been in wave 4 instead of wave B) or are still in wave B – again, we really won’t know until looking at it in hindsight:

Next let’s glance at the SPX daily. Pretty much the same picture as the DOW. It did manage to close above 840, but is right on the bottom of the flag it spent the day building. That flag has a target down around 800 if it breaks down.

Next look at the Transports. They were nailed for another 4.8% today, again on higher volume. They broke beneath the prior December lows looking like they are going to retest the lower November lows. Yesterday some followers of DOW Theory were getting all excited about how the transports made a new low, but the DOW didn’t claiming it set up a possible DOW Theory non-confirmation. That was just wrong as I believe it would need to break the November low and then not have the Industrials join the party. Regardless, didn’t matter as the Industrials and the Transports are both still singing the same tune and DOW Theory is still on a bear market sell signal, I don’t see anything that will change that anytime soon. While we’re here, look at the slow stochastic… it’s pointing down pretty good and has a lot of room still.

Lastly, let’s look at the XLF one month daily. Bollinger is turning down more steeply, and it closed beneath the bottom. Volume today was high, but not as high as yesterday, the general trend is higher volume and lower prices. The financials have been a real anchor to the economy. How many economists and supposed experts were saying that the financials were isolated and wouldn’t affect the “real” economy? Too many, that’s for sure – take a glance at the retail sales chart above to see how that worked out. Recovery in the second half of the year? Do you see any sign of that here or in the latest earnings reports? I don’t:

Options expiration is Friday… I’m still awaiting the usual fun and games. Overall this is a difficult point in the market to call, a lot of people are having trouble with it as it’s still in the same range, although now getting towards the bottom of the range. The 840 area is now key. If we break that, there’s a good chance we keep on trucking down for a while, but if we hold it, we could rally in the short term.

Of course reality keeps interrupting the Sweet dreams, Steve Jobs just announced he’ll be taking leave through June causing Apple to plunge $10 in a matter of seconds after hours, and the /ES (S&P futures) just fell to 831, well below that 840 pivot.

Tomorrow we have Jobless claims, PPI numbers, Empire State Manufacturing Index, and the Philly Fed Survey. CPI and Consumer Sentiment come out on Friday.

And least we forget, Obama’s inauguration (most expensive ever) is only a week away and that’s got to give people HOPE, right? Sweet Dreams are made of that…